Wednesday, December 06, 2006

When do we Stop Cheering U.S. Stocks: Today?

EUR/USD 1.3270 Hi 1.3342 Low 1.3254
USD/JPY 115.10 Hi 115.26 Low 114.52
AUD/USD 0.7859 Hi 0.7892 Low 0.7846
EUR/JPY 152.77 Hi 153.13 Low 152.44

Well the U.S. Stock Market just can’t stop cheering. Although it has be pointed out ad nauseam that the U.S. economy is in for some pretty hard times in the months ahead AND that the FED may not be in a position to EASE, given the risks for the USD, Stock Markets just keep on rolling. Yesterday we saw more of the same. According to data released yesterday Factory Orders fell 4.7% in October. The market ignored the bad news and cheered the ISM Non-Manufacturing October Index instead. Or at least the Stock Market did.

The U.S. Bond Market seems to be running into something of a brick wall and no-one can work out if it's fear of inflation or fear that international investors will desert future Treasury Auctions because of the USD risk. Time for a bit of blood letting in the U.S. Treasury market. Everyone is long, volatility is rising, year end is coming up and no-one can afford to take any more losses on anything. So stops could be triggered.

Yesterday also saw the release of REVISED productivity numbers for the Q3. And the improvement recorded in productivity was LESS than what was hoped for. Productivity rose a meagre 0.2% in Q3, the market was expecting a rise of 0.5%. Not that the Stock Market took any notice. The Democrats are back in control of both Houses and the Bush Administration is under siege pretty much on all fronts. The possibility that the American Worker will continue to be squeezed in the interests of improved Company Profits is small. This means rising Labour Costs and lower Productivity. It also means a redistribution of income which is somewhat late in coming by about, oh, two decades. This is also potentially inflationary. In the sense that if you actually have to pay people enough to get by on, that’s an increase in your cost base. This also erodes your profit margin. Why U.S. Stocks continue to cheer this scenario is beyond me.

And the news out of Europe, while on the whole positive, is not without the odd wart. Today we saw the release of German Factory Orders for October. The numbers were bad. U.S. numbers are not great, the fall-out in Asia from the U.S. economic slow down is likely to be bad and tomorrow Trichet will announce a Rate Hike. All up not great times for Stock Markets in Europe. It has been a one-way street for equities in Europe since the "correction" we had in May. While a softly, softly approach by Trichet may help calm nerves the upside from here in European equities appears limited.

FOREX Markets are taking the opportunity to close a few positions and hunker down for the Thursday's ECB rate hike and U.S. Employment numbers Friday. So we are seeing USD buying. This little wave of USD buying interest is unlikely to last much beyond Friday but in the meantime we do have a lot of short term speculative positions to close. Ignoring what is happening on markets is NEVER a good strategy unless you have a very long term investment perspective. Right now there are maybe half a dozen players in the market with that kind of long term perspective.

OIL 62.17
GOLD 642.20

GOLD keeps failing to break the USD 650 level. I read somewhere (if I could remember where I would link to the page) that GOLD just featured on the cover of a magazine as the Investment of the Year, or something like that. The comment? "The Kiss of Death". The USD has firmed marginally, there are increasing concerns about the strength of the U.S. economy, the impact this will have on the Asian economy and the fall-out for commodities, so we may be in for some profit taking here. Plus we have numerous commentators calling for GOLD to reach something like USD 2,000 in the nearish term, which is not a bullish market signal. We could see a little bit of a clear out in the GOLD market short term while all the various speculators and Hedge Funds rush for the exits.

OIL is hovering. Bad numbers out of the States could encourage selling as the bearish view on commodities takes hold. OPEC has its work cut out for it.

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